US CPI to Set Tone for FOMC

The consensus is consolidating around a skip, as markets still question how many more hikes the Fed will manage this year.

"Skip" or Pause?

The BOC's action last week was seen as a warning for central banks that get a little too confident that they have managed to get inflation under control. The BOC announced a pause in rate hikes and was forced to resume hikes last week. The Fed is particularly worried about that scenario, which has kept a little less than a quarter of traders still expecting a hike tomorrow.

A couple of weeks ago, some Fed officials floated the idea of a "skip", which differs from a "pause". A "pause" is when the central bank stops hiking and waits for the data, while a "skip" implies that there won't be a rate hike this meeting but the next. Or something like a "hawkish hold". The expectation for the vast majority of traders is that the Fed will not hike tomorrow but insist that a hike in July will happen.

It's All Conditional

What could get in the way of that prediction is if there is a substantial beat or miss in inflation data that will be published later today. The headline CPI change is expected to fall to 4.3% from 4.9% prior. But the core rate is seen staying pretty sticky, only coming down one decimal to 5.4% from 5.5% prior. Naturally, the Fed cares more about the core rate. Monthly core CPI growth is seen slowing to 0.3% from 0.4% prior.

A significant miss in the inflation data could lead to a consolidation of expectations around a "skip", and even some starting to see it as a "pause". But if core inflation is higher, it could put the odds back in favour of a hike. Core inflation being just two decimal points above expectations would show a reversal of the downward trend, which the Fed wants to avoid, and some analysts say it would virtually guarantee a rate hike. Significant market volatility, therefore, could be more around the inflation figures than the rate hike.

Nasdaq At Critical Junction

US Tech stocks have been on the rise for a stretch now, with the break of 13720 opening the door to 15270 a while ago. It remains a major resistance where at least a short-term reversal could ensue, given that prices have reached the upper channel trendline, with a forward path dependent on swing lows.

If Nasdaq accelerates past the channel top and aforesaid ceiling, it could go as high as 15600 over the span of the next few days or weeks before it faces bears. Contrary, losing the low of 14200 could trigger a major selloff towards 13730, with a breakdown eyeing 13k and below in the longer term.

Key Takeaways

CPI data will impact the FOMC's decision on implementing a "skip" or pause in rate hikes tomorrow. A skip means there won't be a rate hike this meeting but the next, while a pause is when the central bank stops hiking and waits for more data. The expectation from traders is that the Fed will not hike tomorrow but will hike in July. However, a substantial miss in inflation data could lead to a consolidation of expectations around a "skip" while higher core inflation could lead to a rate hike. Significant market volatility could depend on the inflation figures rather than the rate hike.